The upheaval in the U.S. financial sector has made market players loath to lend to one another, intensifying the tumult, said Butler

“Liquidity is absolutely the worst I’ve seen in a long, long time and volatility is way up, so when things do turn, moves are clearly getting exaggerated because the markets are so illiquid.”

BONDS RISE

Canadian bonds rallied on a safe haven bid as equity markets took big losses.

“Stocks are just getting killed,” said Levente Mady, fixed income strategist at MF Global Canada Co.

He added, however, that the moves may have gone too far.

“If you look at the stock market, there are certainly a number of measures that indicate that things are overdone a little bit, so you could make the argument that we might see a little bit of a relief rally in stocks, which would have a negative implication for the bond market,” Mady said.

On the data front, foreign investors reduced their holdings in Canadian securities in July for the first time since November 2007, dumping stocks and bonds for a net divestment of C$5.59 billion ($5.22 billion), Statistics Canada said.

Canadian investors resumed their acquisition of foreign stocks in the month, resulting in a net investment in foreign securities of C$1.25 billion.

The two-year bond rose 3 Canadian cents to C$100.40 to yield 2.561 percent, while the 10-year added 10 Canadian cents to C$106.65 to yield 3.436 percent.

The yield spread between the two-year and 10-year bond was 87.5 basis points, up from 85.8 basis points at the previous close.

The 30-year bond gained 5 Canadian cents to C$117.95 for a yield of 3.948 percent. In the United States, the 30-year Treasury yielded 4.078 percent.

The three-month when-issued T-bill yielded 1.75 percent, down from 2.15 percent at the previous close.